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I've always been slightly surprised that founders accept vesting at all. What is to stop the VC from firing you the day before your options mature? Then you w

by finnw 15y ago

I've always been slightly surprised that founders accept vesting at all. What is to stop the VC from firing you the day before your options mature? Then you would effectively have worked for them for free for 2 years, and for a low salary for a year and 51 weeks after that, all at 70 hours a week. I would never give anyone the opportunity to do that to me.

rgrieselhuber 15y ago
Because your shares vest gradually over time, so that by the time you get to year 4, you're well over 75% of the way there.
mhartl 15y ago
The stock vests over time. Four years isn't the typical time for stock to vest; it's the typical time to be fully vested. Usually it's 1/4 per year for 4 years. Vesting doesn't just protect investors. It also protects cofounders. Suppose you start a venture 50/50 with a buddy. After a year, he leaves, and three years later you've bootstrapped the company into a $100m business. Without vesting, your cofounder would still be entitled to 50%. With vesting, he would get 25% of 50%, or only 12.5%.
- pmjordan 15y ago
  Sorry to be nit-picking, but the percentage of shares issued that the departed cofounder holds after 4 years would be 20%. It's not helpful to look at percentages during the calculation: look at absolute number of shares. If 1 share vests each month, the remaining founder has 48 after 4 years, the departed one retains 12, hence 20%. Of course, this ignores any further shares the remainin founder might issue to himself by investing his own money or assets (he holds a majority stake, so that shouldn't be too difficult)
JoshTriplett 15y ago
Vesting of shares does not necessarily imply that you give anyone the right to fire you. For example, a company with several founders might choose to use vesting even if they never take or need VC funding, to deal with the case where a founder voluntarily chooses to leave early on. And while an arrangement with a VC could potentially grant them the ability to fire a founder, it doesn't necessarily have to, and I've seen plenty of cases where the founders did not agree to such terms (especially in cases of VCs signing on with well-established companies).
getsat 15y ago
> What is to stop the VC from firing you the day before your options mature? Perhaps they'd like people to actually consider taking investment money from them in the future? Your "cliff" is typically one year, anyways.
InclinedPlane 15y ago
"What is to stop the VC from firing you the day before your options mature?" A severance option in your contract which would make it even more lucrative for you if they tried to get rid of you without a really, really good reason (like a criminal conviction).
sshumaker 15y ago
As others have suggested, you would have likely vested 98% of your stock by then by then (typically 4 year terms with 1 year cliff, vesting monthly after the first year). There are also often trigger clauses, which cause your stock to vest instantly when certain conditions are met. Being fired without cause (and cause here typically means a criminal conviction) is typical, although this can be structured to only take effect if the firing takes place after a liquidity event ('double trigger').
jfarmer 15y ago
1. The standard vesting arrangement is four years with a one-year cliff. This means 25% of your stock (as a founder) vests at the end of the first year, and the remainder vests month-to-month for the next three. In your scenario it sounds like the founders have been at it for two years before their first financing. 2. Why does the VC even have the right to fire the founders or CEO? The board has that right, and presumably the VC is on that board, but their rights are defined in the financing agreement. Control is an important negotiating point when raising a round of financing. 3. Why would a VC want to invest in a company where the founders have completely vested? What's to stop them from running off with the money, so to speak? 4. That said, I've seen incorporation documents where some small portion of the founders' stock is vested immediately (maybe 5%), and the remainder follows the standard four-year vesting, one-year cliff arrangement. This makes it a little harder to raise money and the VCs might insist on changing the vesting schedule as part of the financing agreement. Generally it's just easier to have everyone on the same vesting schedule, that way nobody can object.
- adrianscott 15y ago
  1. That's the standard vesting arrangement for non-founders. I have trouble imagining a cliff for founders.
  - jfarmer 15y ago
    It's normal in my experience. A cliff of some kind has been part of every incorporation agreement I've seen or signed. http://startuplawyer.com/incorporation/why-your-startups-founders-stock-should-vest-over-time http://startuplawyer.com/incorporation/why-your-startups-fou... http://www.startupcompanylawyer.com/2007/07/19/what-should-the-vesting-terms-of-founder-stock-be-before-a-venture-financing/ http://www.startupcompanylawyer.com/2007/07/19/what-should-t... Moreover, if I were working with a co-founder, I would (and have) insist we vest on that schedule, and certainly not monthly from day 1. There are a few reasons: 1. I don't want my co-founder leave before a year and having a chunk of the company. Likewise, I want to do right by my co-founder. If I leave before a year is up, it wouldn't be right for me to own a chunk of the company. 2. It's inequitable for the founders to have different vesting schedules than employees. What happens if someone joins the team pre-financing? If they get the same terms as the founders, then what about an early employee vs. a later employee? It makes for a weird, political situation. 3. It makes it easier to raise money. If you're vesting on the same terms as your investors they have no basis to negotiate over that term; they'll just check the box and move on. It passes the "blink test." These are just my experiences, so YMMV.

by finnw 15y ago

rgrieselhuber 15y ago

Because your shares vest gradually over time, so that by the time you get to year 4, you're well over 75% of the way there.

mhartl 15y ago

The stock vests over time. Four years isn't the typical time for stock to vest; it's the typical time to be fully vested. Usually it's 1/4 per year for 4 years. Vesting doesn't just protect investors. It also protects cofounders. Suppose you start a venture 50/50 with a buddy. After a year, he leaves, and three years later you've bootstrapped the company into a $100m business. Without vesting, your cofounder would still be entitled to 50%. With vesting, he would get 25% of 50%, or only 12.5%.

pmjordan 15y ago
Sorry to be nit-picking, but the percentage of shares issued that the departed cofounder holds after 4 years would be 20%. It's not helpful to look at percentages during the calculation: look at absolute number of shares. If 1 share vests each month, the remaining founder has 48 after 4 years, the departed one retains 12, hence 20%. Of course, this ignores any further shares the remainin founder might issue to himself by investing his own money or assets (he holds a majority stake, so that shouldn't be too difficult)

JoshTriplett 15y ago

Vesting of shares does not necessarily imply that you give anyone the right to fire you. For example, a company with several founders might choose to use vesting even if they never take or need VC funding, to deal with the case where a founder voluntarily chooses to leave early on. And while an arrangement with a VC could potentially grant them the ability to fire a founder, it doesn't necessarily have to, and I've seen plenty of cases where the founders did not agree to such terms (especially in cases of VCs signing on with well-established companies).

getsat 15y ago

> What is to stop the VC from firing you the day before your options mature? Perhaps they'd like people to actually consider taking investment money from them in the future? Your "cliff" is typically one year, anyways.

InclinedPlane 15y ago

"What is to stop the VC from firing you the day before your options mature?" A severance option in your contract which would make it even more lucrative for you if they tried to get rid of you without a really, really good reason (like a criminal conviction).

sshumaker 15y ago

As others have suggested, you would have likely vested 98% of your stock by then by then (typically 4 year terms with 1 year cliff, vesting monthly after the first year). There are also often trigger clauses, which cause your stock to vest instantly when certain conditions are met. Being fired without cause (and cause here typically means a criminal conviction) is typical, although this can be structured to only take effect if the firing takes place after a liquidity event ('double trigger').

jfarmer 15y ago

1. The standard vesting arrangement is four years with a one-year cliff. This means 25% of your stock (as a founder) vests at the end of the first year, and the remainder vests month-to-month for the next three. In your scenario it sounds like the founders have been at it for two years before their first financing. 2. Why does the VC even have the right to fire the founders or CEO? The board has that right, and presumably the VC is on that board, but their rights are defined in the financing agreement. Control is an important negotiating point when raising a round of financing. 3. Why would a VC want to invest in a company where the founders have completely vested? What's to stop them from running off with the money, so to speak? 4. That said, I've seen incorporation documents where some small portion of the founders' stock is vested immediately (maybe 5%), and the remainder follows the standard four-year vesting, one-year cliff arrangement. This makes it a little harder to raise money and the VCs might insist on changing the vesting schedule as part of the financing agreement. Generally it's just easier to have everyone on the same vesting schedule, that way nobody can object.

adrianscott 15y ago
1. That's the standard vesting arrangement for non-founders. I have trouble imagining a cliff for founders.
- jfarmer 15y ago
  It's normal in my experience. A cliff of some kind has been part of every incorporation agreement I've seen or signed. http://startuplawyer.com/incorporation/why-your-startups-founders-stock-should-vest-over-time http://startuplawyer.com/incorporation/why-your-startups-fou... http://www.startupcompanylawyer.com/2007/07/19/what-should-the-vesting-terms-of-founder-stock-be-before-a-venture-financing/ http://www.startupcompanylawyer.com/2007/07/19/what-should-t... Moreover, if I were working with a co-founder, I would (and have) insist we vest on that schedule, and certainly not monthly from day 1. There are a few reasons: 1. I don't want my co-founder leave before a year and having a chunk of the company. Likewise, I want to do right by my co-founder. If I leave before a year is up, it wouldn't be right for me to own a chunk of the company. 2. It's inequitable for the founders to have different vesting schedules than employees. What happens if someone joins the team pre-financing? If they get the same terms as the founders, then what about an early employee vs. a later employee? It makes for a weird, political situation. 3. It makes it easier to raise money. If you're vesting on the same terms as your investors they have no basis to negotiate over that term; they'll just check the box and move on. It passes the "blink test." These are just my experiences, so YMMV.